U.S. citizens and resident aliens (“green card” holders) must pay taxes on worldwide income.
This means that, even if they do not live in the US and earn income outside the U.S., they must (1) file an annual tax return AND (2) pay taxes on any income they earn (regardless of where they earned it).
But there is some relief.
Congress allows U.S. citizens and resident aliens not to pay Federal income taxes on up to US$102,100 of foreign earned income per year. That is up to US$800 from $101,300 in 2016.
But, be careful – it does not apply to all income and does not exempt them from all taxes.
They can only exclude foreign earned income (such as wages and other compensation for services performed outside the U.S.). Also, the exclusion only applies to income tax. Payroll taxes (social security and Medicare) are not reduced by this exclusion. Similarly, depending on their state of domiciliation or residency, State income taxes may not be reduced by this exclusion.
Finally, there are additional requirements they must meet to avail themselves of this exclusion.
In particular, to qualify for the exclusion, they must be out of the U.S. for 330 days during each 12 month period throughout the tax year or qualify for a bona fide foreign resident test for the full calendar year. The 330-day test is simple math… be out of the U.S. for a total of 330 days and you are qualified. It doesn’t matter where you are in the world so long as you’re not in the U.S.
The bona fide residency test is more complex and it is wise to examine your intentions.
You must move to a foreign country for the “foreseeable future.” This new country should be your home and your home base. When you travel, it’s where you return to. It’s where you lay down roots. It’s where you file taxes and where you’re a legal resident (with a residency permit). In most cases, you will use the 330-day test in your first year abroad. That will give you time to secure residency, find your home base and do all the things necessary to break ties with the taxes of the U.S.
Beginning January 1 of year two, you will file for the Foreign Earned Income Exclusion using the bona fide residency test. The reason you want to use the bona fide residence test when eligible is that it will allow you to spend more time in the United States. Under the 330-day test, you can only spend 36 days a year in the U.S. If you qualify for the residency test under the Foreign Earned Income Exclusion for 2017, you can spend 4 or 5 months a year in the U.S.
Just remember that it is only foreign earned income (earned income for services performed outside the U.S.) that can take advantage of the exclusion.
I hope you’ve found this article on the Foreign Earned Income Exclusion for 2017 to be helpful. For more information on any expat tax concerns please log into our webpage: www.lagattatax.com or contact me at Stephanie.lagatta@lagattatax.com or call (51) 949-968-555. All consultations are free and confidential.
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